From the Editor: Aramco boss sounds the alarm [Gas in Transition]

Energy policy makers the world over were treated to a scathing attack this week by Saudi Aramco CEO Amin Hasser, even though his company is benefiting for the time being from the shortfall in those policies.

In a keynote speech at an industry forum on September 20, he called for a new global consensus on the path forward that the energy transition should take – recognising that decisions have largely led the world to its present difficulties. He fell back on the often-repeated mantra of three energy pillars: energy security, energy affordability and energy sustainability, arguing that the first two had been outright sacrificed in favour of the latter. And his criticisms seemed mainly directed towards decision-makers in Europe, which has gone further than any other region in undermining sources of stable energy supply, without recognising that most of the cleaner alternatives are simply too unreliable on their own.

“When you shame oil and gas investors, dismantle oil- and coal-fired power plants, fail to diversify energy supplies, especially gas, oppose LNG receiving terminals and reject nuclear power, your transition plan had better be right,” he said. “Instead, as this crisis has shown, the plan was just a chain of sandcastles that waves of reality have washed away. And billions around the world now face the energy access and cost of living consequences that are likely to be severe and prolonged.”

He is correct that the poor policy decisions being taken in certain areas of the world are having a significant and lasting impact in most other places. After all, the energy market is more globally interconnected than it has ever been. European hostility over the years to domestic gas demand, to LNG produced from shale gas, to many other sources of supply that could have been harnessed, is now driving away gas supply from countries elsewhere, particularly in Asia, less able to afford such high prices. And those countries have resorted to coal where they can, and if that is still not enough, they face the prospect of rolling blackouts. Europe too has turned the coal plants back on, as they simply cannot obtain LNG fast enough to offset the losses in Russian supply.

Many millions are likely to slide into poverty over the coming year, because energy, which has lifted many more out of poverty over the decades, is now too expensive. Especially as the energy crisis has been accompanied by, and has partly fed into, a food crisis.

Eased fears?

At least in Europe, the energy crisis may not rock economies and societies as greatly this winter as first feared, at least according to an outlying report by Goldman Sachs. The US investment bank estimated in mid-September that wholesale gas prices on the continent would more than halve by the end of the first quarter of next year to under €100/MWh ($1,065/'000 m3). Goldman based its optimism on the fact that Europe has “successfully solved” the risk of supply shortages this winter, having so far filled their storage facilities to close to 90% of capacity. It also cited rising LNG imports and the demand destruction.

Still, the forecast assumes typical weather conditions this winter, and does not jel with most other predictions.  And the demand destruction that has occurred so far – often the result of energy consumers simply cutting back on usage rather than resorting to alternative fuels – is indicative of the economic harm that the crisis has caused.

Of concern is whether European leaders have learned from present difficulties. The signs suggest that many have not. Germany so far is mostly going ahead with its plan to shut down more nuclear power capacity at the end of this year. Ireland has said it might consider using LNG imports, but only on a temporary basis in an emergency, raising questions about how such projects could be funded. There have been some positive signs from the UK, where new prime minister Liz Truss has ended a moratorium on shale gas drilling, and pledged support for more North Sea oil and gas. But it remains to be seen if her government will stay the course in the face of stiff opposition from environmentalists.

The outlook

Spurred on by sky-high prices, new investment in oil and gas supply is arriving. But perhaps not enough, and in any case it will take years for those investments to dampen prices. And when those prices have fallen, the problem is that policymakers may resort to the same short-term thinking, risking further crises further down the line.

“A fear factor is still causing the critical oil and gas investments in long-term projects to shrink,” Nasser continued. “And this situation is not being helped by overly short-term demand factors dominating the debate. Even with strong economic headwinds, global oil demand is still fairly healthy today. But when the global economy recovers, we can expect demand to rebound further, eliminating the little spare oil production capacity out there. And by the time the world wakes up to these blind spots, it may be too late to change course.”

The same argument could be applied to investment in natural gas supply.

Aramco is generating a huge profit from today’s prices. But the supply crunch risks causing a deep economic downturn, which will hurt all society, suppliers included, in the long run. This is not to mention the political risks that volatile economic conditions create. The risk of social unrest and further wars, for example.